By Hussein Kamal Mehrem, Egyptianomics
It is no secret that Egypt suffers a severe economic crisis accompanied with political instability. Egypt exerts noticeable effort to reduce its massive budget deficit, which reached 12.5%, via some harsh austerity measures. The most populous Arab country struggles with the provision of meaningful jobs for its youth as to meet their aspirations for social justice and a better future. The energy crisis is also visible to its citizens who constantly experience power cuts.
As a response to the ailing economy, the Egyptian government launched several mega projects, mainly infrastructure projects, such as the Suez Canal and the golden triangle as to reinvigorate growth. Massive amounts of funds are poured into building roads, public infrastructure and reviving the tourism industry. One may argue that the nature of the response and efforts for economic recovery entail a strong Keynesian element. There can be numerous of varying views of whether the latter response is the most prudent one. There is always an opportunity cost. The funds allocated for those massive projects could have been allocated for other sectors that would have a better multiplier effect for the economy.
As mentioned earlier, Egypt suffers a major energy crisis and it is expected to remain for years to come if the country does not address the structural causes of it. The crisis does not only harm households but industries, which in turn reflects in poorer economic performance. Egypt also has some serious environmental issues that tend to be ignored in national planning activities. Environmental issues in Egypt include air pollution, water pollution and soil contamination. The World Health Organization reports that the Air Pollution in downtown Cairo is 10-100 times what is considered a safe limit.
Moreover, Egypt is in no isolation from the hazards of climate change. According to an OECD report “given that Egypt’s population, land-use and agriculture, as well as its economic activity are all constrained along a narrow T-shaped strip of land along the Nile and the deltaic coast, it is extremely vulnerable to any adverse impacts on its coastal zones and water availability from the Nile. Climate change poses significant risks through sea level rise on the costal zone, which is already subsiding at approximately 3-5mm/year around the Nile delta.
There is also some possibility of significant decline in Nile stream flow under climate change as a result of changes in precipitation. Coastal zone and water resource impacts have also serious implications for agriculture: sea level rise will adversely impact prime agricultural land in the Nile delta through inundation and salinization, while the intensive irrigated agriculture upstream would suffer from any reductions in Nile water availability. Therefore, climate change is a serious development concern for Egypt”. A reduction in water supplies from the Nile, which is expected due to the Ethiopian Renaissance dam, would adversely impact energy availability since hydroelectricity generation make up nearly 20% of Egypt’s energy portfolio.
Global environmental hazards and the Egyptian strive for economic recovery and the long term well-being of its citizens could meet somewhere in the middle. There is an immense scope here for Egypt to kick-start its economic take-off on different grounds than the usual business. If the current government is spending enormous amounts of money on traditional infrastructure projects (some of them will have long-term polluting effects –roads will encourage more cars to be used) to stimulate the economy, wouldn’t be as well to spend it investing in technologies in the new technologies that we know we are going to need to address the environmental and resource challenges of the 21st century?
In his book “Austerity without Growth: Economics for a Finite Planet”, Tim Jackson draws our attention to the multiple benefits of targeting public sector investments towards energy security, low-carbon infrastructures and ecological protection, these include:
- Freeing up resources for household spending and productive investment by reducing energy and material costs
- Reducing reliance on imports and exposure to the fragile geopolitics of energy supply
- Providing a boost to jobs in the expanding environmental industries sector
- Protecting valuable ecological assets and improving the quality of our living environment for generations to come
Deutsche Bank has also identified what they called ‘green sweet spot’ for stimulus spending comprising of investment in energy efficient buildings and industrial appliances, the electricity grid, renewable energy and clean public transportation. The advantage of this green sweet spot is the labour intensive nature of many of those green sectors. That is surely of significant importance to a country with high unemployment and disguised employment rates such as Egypt. Projects such as desalination or farming using renewable energy in 20 or 30 years time will not be perceived as a luxury but an absolute necessity. The International Energy Agency (IEA) has estimated that energy investments needs between 2010 and 2030 will be in excess of $35 trillion of which a sizeable amount will surely be allocated for green energy investments. Hence, there is a lucrative investment opportunity here for both small and big investors in Egypt to be at the forefront of the 21st century and meet the new demands.
The key advantage of a green oriented strategy for Egypt would obviously be the fuel and resource savings. For instance, some simple measures to enhance the energy efficiency of the domestic housing stock have payback times of less than 2 years according the ecologist Tim Jackson. The government would also re-collect significant parts of its investment through fuel cost savings as well as savings in public expenditure resulting from reduced health costs, lower congestion, lower levels of pollution and of course the expansion of green jobs.
The government of Egypt could deliberately use sticks and carrots with businesses to attain its green goals. Carrots could be used through direct subsidies for industries that are committed to green investments. The government could coordinate with the private sector where support is under the condition of meeting certain green targets in terms of investment and employment. It may also utilize sticks with energy intensive industries via a carbon price and the full removal of the current energy subsidies for them. Direct support for the financial industry could be allied with requirements that lending be preferentially targeted at sustainable investments.
I believe there is a pressing need for Egypt to hasten the process of a green economic strategy for the multiple reasons mentioned earlier. It is noteworthy to stress the importance of investing in home-grown green industries. It is an infant industry with enormous prospects for knowledge accumulation and driving Egyptian industry forward. The deployment of the country’s research and educational institutions in collaboration with industry in such a promising project has the potential to create a virtuous cycle of knowledge accumulation, manufacturing value-added green products and acquiring an international competitive advantage for Egyptian industries and its research institutions. The quicker we start the greater the financial and non-financial rewards. However, some would argue that Egypt cannot afford such costly investments. The experience of raising funds for the Suez Canal proved to be a very successful tool that could be replicated for a green stimulus. Other financing schemes are worth considering such as the expansion of the tax base, progressive taxation or the introduction of a new green tax. That is also not to rule out the possibility of foreign investments in the field that could lift some of the financial pressure expected.
In summary, achieving long-term socio-economic goals for a country suffering of years of corruption and bad economic management shall take more than traditional approaches to development. It is the 21st century with new challenges and if Egypt is to play any role in the new economic system it has to establish a competitive advantage for itself, while achieving domestic environmental, social and economic goals. Green investments could potentially solve manifold bottlenecks in Egypt and shall be taken seriously.